The Standard Variable Rate and the Mortgage Prisoners
Private residential landlords are typically long term investors and supposedly quite canny too.
So one would expect them to typically opt for mortgages which at the end of any initial “teaser” fixed or discounted term would “go to” or “revert to” a rate which was going to be very competitive over the long term.
And yet I often hear of landlords who are now stuck on awful standard variable rate mortgages and who are constantly trying to move mortgage to get a better rate. In many cases, these landlords opted for great teaser rates but forgot to look at what the lenders “revert to” or “reversionary rate” was.
And this phenomenon is not just restricted to landlord mortgages either – lots of people on residential mortgages made the same mistake.
So, at a recent mortgage brokers’ convention, at the end of a presentation by YBS’s buy to let arm, Accord, there was dead silence when I said that I had always opted for mortgages which – whilst maybe not the cheapest initially – always reverted to a lifetime rate which was low and linked to the Bank of England’s base rate for the rest of the life of the mortgage. I added that doing this is one of the key factors explaining my personal success as a landlord.
So, why the sound of tumbleweed and the dead silence from the assembled brokers?
Well, it might just be that there are lots of brokers out there who, when recommending a mortgage, always had a view to switching their clients into new mortgage products further into the future.
If they had recommended their clients to opt for a lifetime BOE tracker rate, then it may well have been that there would have been little opportunity to switch that client onto a new mortgage in the future – and, of course earn another round of fees!
Now, I’m not blaming all brokers here. Lots of them have their client’s best interests at heart and we can never rule out the short-termism and stupidity of the client in being blinded by an initial low mortgage rate and forgetting to find out that the standard variable rate (SVR) was pretty lousy (and, of course, at the lender’s discretion to be put up or down any time they like in order to protect the lender’s profit margins).
The media doesn’t help either. Even the up-market FT rarely bothers to inform readers what the “revert to” mortgage rate is, so people are hardly made aware of the dangers.
And that’s a shame because once again we are now seeing lenders hike up their standard variable rates to protect their margins and assets. Many borrowers with high loan to values or other “hard to place circumstances” are now effective “mortgage prisoners” – unable to move lender to a better rate and stuck on expensive SVRs.
But it’s not as if this has never happened before. The UK’s mortgage lenders have a lot of history of doing exactly the same thing. The first credit crunch I recall was in 1989. My lender back then was National Home Loans – and I was stuck on their SVR. They promptly upped their SVR hugely to cope with a lack of access to finance on the money markets.
I learnt my lesson back then and since that experience I always plumped for mortgages where the “revert to” rate was a BOE rate tracker.
So why aren’t mortgage customers and their broker advisers also learning to look beyond the initial great first two years or three years offer?
When will they ever learn?
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